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- More and more investors have invested in cryptocurrency in 2021, but so have fraudsters who have discovered the crypto industry for themselves.
- The number of crypto scams and thefts has increased significantly and the damage amounted to more than $7.7 billion this year alone
Cryptocurrencies have gained significant traction among investors. Investment in the crypto market has increased globally, and this trend is expected to continue for the foreseeable future. Crypto market volume size is expected to grow from $1.6 billion now to $2.2 billion by 2026, at an average annual growth rate of 7.1 percent. These figures come from an April 2021 report by Markets and Markets Research.
In many countries, even banks have started buying cryptocurrencies, the report said. Banks in the U.S. are now creating their own blockchain-based systems, including digital currencies, to enable B2B cryptocurrency payments between their customers.
However, the growing interest in cryptocurrencies has also led to increased financial crime, according to the 2021 Crypto Hacks & Scams Report from Crystal Blockchain, a company that provides an investigative analysis of blockchain and cryptocurrencies. The Crystal Blockchain report, released Dec. 21, shows that as of Dec. 17, 2021, there have been 115 security attacks, 40 attacks on DeFi protocols, and 26 fraud crimes that have resulted in the theft of about $10 billion worth of crypto assets. So, there have been huge asset losses related to cryptocurrencies, and the recent International Monetary Fund research report even states that cryptocurrencies are a threat to global financial stability.
Related: With crypto adoption at record highs, here are the 3 main concerns for the IMF
The market value of the ecosystem has increased extremely in 2021. According to the IMF report, the financial stability issues posed by cryptocurrencies mainly include operational, cyber, and governance risks, integrity risks (market and AML/CFT risks), data availability and reliability issues, and cross-border transaction issues. So, with the rise of crypto-crime, especially fraud, the financial system is becoming more vulnerable.
Alarming rise in crypto fraud in 2021
With an 81 percent increase in crypto scams, it has resulted in the loss of over $7.7 billion worth of cryptocurrency worldwide in 2021, according to a recent report by Chainalysis.
One of the most common scams is the so-called rug pull, a new type of fraud in which the initiators and operators of a cryptocurrency project – usually a new cryptocurrency – suddenly disappear quite easily – with the customers’ deposited fiat funds, of course. Despite a significant drop in crypto scams between 2019 and 2020, the number of rug-pull scams jumped in 2021. Overall, investors lost over $2 billion worth of cryptocurrency, nearly 90 percent of which was due to “rug pulls.”
Related: Mark Cuban’s enthusiasm in DeFi curbed after suspected rug pull hit
According to the Chainalysis report, the number of active financial fraudsters increased by more than 60%, from 2,052 in 2020 to 3,300 in 2021. Being active in this context means that funds were sent to their wallets.
Madan Sabnavis, chief economist at credit rating agency Care Ratings comments:
Gullible people invest in these fictitious currencies and will lose money as every trade is a zero-sum game. Cryptocurrencies are opaque because there is no underlying asset to support the price. For gold there is a metal, for stocks there is a share, but for cryptocurrencies there is no such thing
2021 saw the largest theft of crypto assets
With the theft of more than $10 billion worth of assets, 2021 had the largest crypto asset losses to date, Crystal Blockchain’s report shows. It also shows that the amounts being stolen are steadily increasing.
DeFi hacks have become the most common type of crypto theft in 2020-2021, and their total amount has doubled, the report explains. To date, $2.86 billion has been stolen by exploiting security vulnerabilities, while $6.8 billion in damage has come from fraud. Thus, crypto fraud accounts for more than 65 percent of the relevant crime.
According to Crystal Blockchain data, 39 percent of all stolen funds were laundered and distributed through fraudulent exchanges.
The anonymity of crypto assets and lack of global security standards lead to significant data gaps for national regulators. The problem is that all these transactions are opaque and one cannot be sure if the money is being diverted to drugs or other illegal activities. Today, many financial savings are diverted to crypto markets, which is not good for the affected countries.
